In the spring, Ontario investors’ fancy lightly turns to thoughts of real estate. And where investors go, so too go the regulators. We aren’t surprised, therefore, to see both the Canadian Securities Administrators (CSA) and the Financial Services Commission of Ontario (FSCO) outline changes to the regulatory framework for syndicated mortgages.
A. CSA Proposal On March 8, the CSA published for comment proposals to enhance investor protection and increase harmonization in the regulatory framework for syndicated mortgages. The proposed amendments will affect National Instrument 45-106 Prospectus Exemptions (NI 45-106) and National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). In particular:
- The existing prospectus and registration exemptions for securities that are syndicated mortgages (the “Mortgage Exemptions”) in Ontario, Newfoundland and Labrador, the Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island and the Yukon will be removed. This will bring the regulatory framework in these jurisdictions into alignment with the rest of Canada.
- The private issuer prospectus exemption (Private Issuer Exemption) also will be removed for distributions of syndicated mortgages.
- As a result of these changes, exempt distributions of syndicated mortgages in Canada will have to rely upon another prospectus exemption, such as the accredited investor exemption (AI Exemption), offering memorandum exemption (OM Exemption), or family, friends and business associates exemption (FFBA Exemption).
- In Ontario and other jurisdictions where the Mortgage Exemptions currently apply to syndicated mortgages, market participants that are in the business of trading syndicated mortgages will need to determine whether the registration requirement applies to them. The proposed changes to the registration exemption will take effect one year after the proposed changes to the prospectus exemption to give market participants time to register as required.
- Consistent with the current approach in British Columbia for syndicated mortgages distributed under the OM Exemption, the proposed amendments will require supplemental disclosure tailored to syndicated mortgages. In addition, mortgage brokers involved in a distribution of syndicated mortgages will have to provide a certificate to investors that the offering memorandum does not contain any misrepresentations with respect to matters within the broker’s knowledge and that the broker has made best efforts to ensure that matters not within its knowledge do not contain a misrepresentation.
The comment period on the proposed amendments closes on June 6, 2018.
B. FSCO Changes for Syndicated Mortgage Transactions Take Effect July 1, 2018
As we noted in our November 2017 Bulletin, the Ontario Government plans to amend the Securities Act to transfer regulatory oversight of syndicated mortgage transactions from FSCO to the OSC. In the meantime, it has amended Regulation 188/08 Mortgage Brokerages: Standards of Practice (the Regulation) so that brokerages which deal with non-qualified, syndicated mortgage transactions will have meet expanded requirements beginning on July 1. In general terms, non-qualified syndicated mortgages are more complex, higher risk products that might not be suitable for the average investor. Under the new requirements, mortgage brokerages that deal with such transactions will have to:
- Collect and document information relating to the potential investor’s or lender’s financial circumstances, needs and risk tolerance;
- Undertake and document a suitability assessment for each potential investor or lender;
- Collect and document expanded disclosure information;
- Observe a $60,000 limit on non-qualified syndicated mortgage investments over a 12-month period for investors or lenders who aren’t part of a designated class that meets higher income and asset tests; and
- Report written complaints received by the brokerage about non-qualified syndicated mortgages to FSCO’s Superintendent of Financial Services within ten business days.
New forms covering the prescribed information to be collected and/or disclosed will be made available in June.